What's better: Slow erosion in freight rates, or a sudden drop?

Tuesday, May 07, 2013

Container carriers might actually be better off if freight rates crashed suddenly rather than gradually erode for months, contends SeaIntel Maritime Analysis.
In the current issue of its SeaIntel Sunday Spotlight, the firm analyzed the prospects for carriers' profitability in 2013 seen in the light of current rate declines.
“This leads to the, somewhat counter-intuitive, conclusion that carriers should potentially lower rates drastically in order to become profitable in 2013,” said Lars Jensen, the firm’s chief executive officer.
“The key lies in the understanding of the ‘game’ played between carriers. As the container shipping industry is a zero-sum game, carriers are de facto forced to match each others' rate declines in order to maintain their vessel utilization. This will continue until such a point where the losses per unit becomes unacceptable for all parties. Then discipline will be re-introduced, capacity will be reduced and rates will be increased drastically. This is also what we saw in late 2011 and early 2012.”
Jensen said SeaIntel has modeled two scenarios. One scenario had rates continue to decline $25 per TEU per week until losses become unsustainable and increases are successfully pushed through. Another scenario posited aggressive rate declines resulting in rates bottoming out within just a few weeks.
“The models show, that aggressive rate declines will result in a better overall result for full year 2013 than a slow gradual rate erosion. With the particular assumptions in the newsletter, this amounts to added annual revenue in 2013 of $2.8 billion on the Asia-Europe trade,” Jensen said. ”Clearly different opinions can be had as to how low rates need to go before losses become unacceptable and discipline is re-instated - and thus what the annual revenue gain would be. However the fundamental conclusion remains unchanged. Aggressive rate declines might very well lead to a higher profitability overall for the carriers in 2013 than a slow protracted rate erosion.
“As late as today, we are getting input from shippers out in Asia that they are getting offers from NVOs (non-vessel-operating common carriers) all the way down to $650 per TEU” on the Asia-Europe trade lane, Jensen said. As recently as March the Shanghai Container Freight Index had pegged rates on the Asia-Europe trade lane at over $1,400 per TEU.
In the transpacific, he said “the story is partially the same, but it is not quite a volatile as Asai-Europe trade… As we are now seeing several carriers come out and begin to announce new services on the transpacific that will put a distinct negative pressure on freight rates.” - Chris Dupin